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Growth under extractive institutions is unsustainable

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The example of the Soviet Union provides a vivid illustration of how the authority and incentives provided by the state can spearhead rapid economic growth under extractive institutions and how this type of growth ultimately comes to an end and collapses.

Stalin energized the Gosplan, which wrote the first Five Year Plan (1928-1933). The plan was simple: develop industry by government command and obtain the necessary resources for this by taxing agriculture at very high rates.

The communist state did not have an effective tax system, so instead Stalin “collectivized” agriculture. This process entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Party.

In some instances the productivity of labor and capital may be so much higher in one sector or activity, such as heavy industry in the Soviet Union, that even a top-down process under extractive institutions that allocates resources toward that sector can generate growth.